IT Contractor Tax: What Do I Have to Pay?

59408665 - server virtualization software it infrastructure managementA couple of weeks ago we spoke of the contractor tax changes that came about as a part of Budget 2016, and how these can affect current and aspiring contractors on their journey to keeping their finances in order.

Tax planning is, of course, never simple, which is why we thought it would be a good idea to dig into a specific example to underscore exactly what taxes you are due to pay as a contractor. Here we’ll be focusing on IT contractors that are operating as a Limited company. Though we recommend speaking with your accountant regarding what you, specifically, are due to pay, the following tax liabilities are typical:

Corporation Tax

Corporation tax has to be paid on your Limited company’s profits; the figure that emerges once your business expenses have been deducted from your revenue. Your expenses include everything from the rent for your office to your own salary.

As an IT contractor operating as a Limited company you’ll be required to pay corporation tax on an annual basis, with this period being referred to as your ‘Corporation Tax accounting period’. This will typically align with your financial year, which for most of us aligns with the tax year, April 6-5.

Tax on Dividends

One of the main advantages of IT contractors choosing to operate as a Limited company is that in doing so you’re allowed to pay yourself a combination of an annual salary and dividend payments. For this reason, many contractors operating as a Limited company choose to pay themselves minimum wage for their annual salary and receive the rest of their income as dividend payments, as the latter are taxed at a lower rate.

Tax on dividend payments is currently 7.5% for Basic rate taxpayers, 32.5% for Higher rate, and 38.1% for Additional rate. Starting in April of this year (2016) contractors operating as a Limited company no longer have to pay tax on their first £5,000 of dividend payments.

Income Tax and National Insurance Contributions

Another reason why IT contractors choose to pay themselves minimum wage through their Limited company is because income tax and National Insurance Contributions (NICs) are only payable on your salary; not dividend payments.

As your company’s director, you will personally need to get in touch with HM Revenue and Customs (HMRC) to register a PAYE scheme through which to pay your salary. Your accountant can help you to work out what income tax and NICs are due. And as always, you and your accountant should take the time to ensure you’re not operating within IR35 in order for you to operate efficiently.

Experienced Accountants for IT Contractors

To speak with a professional accountant to discuss more tax planning tips for contractors operating as a Limited company, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

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